The New Poor

A new story came out about a sharp rise in poverty in America.  Over the course of the year, poverty increased by a full percentage point.  One in ten Americans now live in poverty.  It makes you wonder how one of the richest countries in the world seems so poor.

Over the past few decades, jobs have been leaving America to go to over seas.  This has happened because the same goods produced in America have become cheaper to produce in other countries.  The cheaper production price causes American goods to become less competitive, resulting in factories and manufacturing industries to close down or relocate to different countries.  Due to this, a new group of poor is developing.  This group consist of former manufacturing and mill workers that lost their jobs, and have skills that are specific to a certain industry.  Unfortunately, the jobs they are trained for no longer exist in America.  There are limited industries in America that will lead the average worker into the middle class as compared to the days of the booming manufacturing era.

What is a country to do when there is a growing number of workers that are not trained to perform the needed economic job functions?  INVEST INVEST INVEST!!!! The stimulus package passed by the Obama Administration and the proposed additional stimulus package offers some training for workers.  At a time of such deep recession, there is no reason why the government shouldn't invest into its economy and workforce.  Direct aid and works projects are the best stimulus for any weak economy, and at the current moment the economy is very weak.  Additionally, there is no better time to start research and development into new renewable energy sources and slow down our dependence on foreign oil.

We have the ability to help transition the workforce of the old manufacturing plants into a new generation of domestic energy industry workers.  We can help alleviate the unemployment problem while training our workers to be competitive in the energy sector.  Additionally, we will have the ability to become a global leader in new energy sources, increasing further investment for our country.  Unfortunately politics comes before economics and need.  Most likely, the unemployed workforce will be forgotten and become a part of structural unemployment in America, unless if the government stops acting like fiscal hermit crabs and begins to take the recession seriously and takes the initiative to put people back to work.

Eat the Rich?

The most heated debate in Washington in the economic circle is whether or not to allow the Bush Era tax cuts for the highest earners to expire. This argument is becoming tired with the same information being thrown back and forth between liberals and conservatives. Yes, it’s true that the government shouldn't raise taxes in a recession, and yes, the government does need to control the budget deficit. It seems that we have a sticky situation here. It is almost impossible to keep taxes at the current rate and control the budget deficit at the same time without cutting spending, but even that will hurt the economy.

So what is a country to do? How can we promote economic growth while managing our budget deficit? If you said to look at the recent economic data released and follow trends to manage where fiscal stimulus is most effective, I wouldn't believe you because you would be dead on correct. As you probably know, the Congressional Budget released its quarterly report about the effects of the
stimulus package.  This information is very telling on what has been successful and what has been relatively ineffective in aiding our fragile economy.


The report has basic macroeconomic trends including employment, economic growth, etc...But the most important information lies within the section that explains the multipliers. A multiplier is an economic tool used to measure how one dollar flows throughout the economy. For example, if a tax break has a multiplier effect of 2.0, this means that every one dollar invested yields two total dollars that flows through the economy.

So what does the report tell us?

The best tool to further stimulate the economy is..... purchases of goods and services by the government (1-2.5); transfer payments to states and local governments for infrastructure (1-2.5); and transfer payments to individuals (.8-2.1. This is unemployment insurance, student financial assistance; this is not a tax break). Basically what the report tells us that government spending has been stimulating the economy over the past quarter. Are you interested in how well the tax breaks have been? For middle income earners, the multiplying effect was .6-1.5 and for high income earners it was .3-.8. An important note is that anything under 1.0 means that money is actually lost. So a tax break for high income earners actually losses money.

So does this mean we can grab our forks and knives and dig into the riches incomes? Not yet. The rich serve a very important function in the economy. They save money unlike people in the middle and lower classes. We need the people making a lot of money to save money so interest rates can stay low. After a few years when the economy settles, then we can enjoy the riches salaries.  For now, we should temporarily extend the tax cuts for two or so years, then see how the economy is doing to change our current fiscal situation.  

Does College Prepare Students For The Office Or For Happy Hour?

The Economist published a report on recent graduates between the ages 25-34 and the skill level of employment they find themselves in.  What is most concerning is that about 33% of American graduates find themselves under-employed; or under utilizing the skills and education they acquired in college.  The U.S. is about 10 percentage points higher than the world average.  Luckily for us that our average income is among the highest in the world at $56,200 a year. 

This worries me because I have many friends that just entered the labor force that I graduated with.  Many of them are very intelligent and performed well in their majors.  Here is my theory on why younger people are finding themselves underemployed.  The value of a college degree has devalued over the years.  More young people are going to college than ever before.  With two year colleges and more universities opening, young men and women have the opportunity to get an education.  Unfortunately, there is only a limited amount of work a person can find in their field of study.  The positive is that we have a more educated work force, the problem is that the workers are being undervalued and their full potential is not being reached.  This makes the job searching process more competitive then ever, and in theory the best candidates will be hired for jobs; of course if you know some one it will help out a lot more.  As my favorite saying goes, "it's not the grades you make but the hands you shake."

Enjoy your “Non-labor” day

The first Monday of every September, our nation takes a day off from work as a way to show thanks for those that work and propel our economy. However, this particular Labor Day is somewhat bitter sweet because of the sluggish job numbers. The economy has been improving, adding more jobs to the private sector than previously expected; however, the unemployment rate stayed around 9.5%. In the later stages of the worst economic situation since the Great Depression, millions of people are still unemployed and looking for jobs.


When President Obama took office, the recession was beginning to show serious strains on the economy. In desperation to not let the recession turn into a depression, Congress enacted a stimulus package close to $800 billion dollars. Criticism was met from the left and right whether the package was aimed at the right targets. Liberal leaning policy makers argued for more government backed work projects while conservative law makers pushed for more tax breaks to stimulate the supply side of the economy. What was created as the final product was a package that was made up of tax breaks, tax credits and public works projects as a way to hit the recession head on and really fight it so people can stay in work and really have a reason to enjoy their day off on Labor Day.

In the beginning of 2009 when all the projections about the stimulus package was made, many left out probably the most important fact about the economic situation. The Congressional Budget Office estimated that the hole in the economy left from the recession would be close to $3 trillion dollars. I am not a mathematician, but the difference between $3 trillion dollars and $787 billion dollars is a huge sum; $2,213,000,000 to be exact. Think of it in like this. The American economy is worth close to $12 trillion. The hole that would have been left without any stimulation package would have been about roughly a fourth of the entire economy.

When economic reports show that the job finding rate is lower than originally projected, it should be no wonder why. To show faith to the people suffering from the recession, President Obama introduced a proposal to help create jobs and stimulate the economy. His plan is to invest $50 billion dollars into shovel-ready projects, such as improving our roads, railways, ports, etc. His plan also consists of a tax credit for all businesses to write off all inventory purchases. This means if a company buys a computer, they can write it off as a tax deduction.

Why is this proposal effective? The most important piece of knowledge learned in an introductory econ class is that people respond to incentives. Currently, the biggest problem to the economy is that businesses are sitting on money because they are unsure of future economic conditions. If businesses have an incentive to spend money, they will invest into new inventory, and this will increase the amount of money that circulates through the economy. Obama’s proposal has been met with excitement from both liberal and conservative economist. Conservative economist Greg Mankiw feels that this plan heads the economy into the right direction .

With bipartisan support from economist, there is no way this plan will be met with opposition, right? Why would a law maker want to vote against tax credits for businesses and help put people back to work? The answer to that is there has been a great deal of populist anger manufactured at the government. People are unwilling to let the government create jobs and stimulate the economy. If this attitude continues, Labor Day will have a new meaning. We will honor those that have jobs simply because it is amazing that they were able to get a job.

Why Al Gore Will Increase Our Spending and Why We Should Thank Him

All week I have been hearing about Hurricane Earl and its imminent touchdown on the East Coast.  What struck me most was that there was three more hurricanes following Earl practically on the same path towards the east coast.  Al Gore, scientist and hippies have been claiming that we are changing our climate, and our doom is coming very soon (maybe not that extreme).  Anyways, it is documented that our weather has changed.  Over the past couple years, the weather has become more extreme.  For example, the heavy snowfall in Washington DC, hurricane Katrina, the tsunami in southeast Asia, record breaking heat, and the countless other examples.  Unless you are part of the twenty five percent of the population that believes Barack Obama is a Muslim, global warming is a real thing.  So what are we doing to try to stop climate change?  Congress has basically narrowed it down to two options.  The first is a carbon tax, and the more popular choice is cap and trade.  Both choices are basically a tax on carbon products.  Below is a basic supply-demand chart of what a tax on carbons will do to the carbon market:

   

I had to borrow this graph from a website because I do not know how to create images on this blog.  What this graph is showing is that any tax on carbon or emissions will create an artificial price for the products that emit carbon (gasoline and oil).  The market price can be found at q1 (x-axis) and p1 (y-axis).  Any time the government involves itself into a market, inefficiencies are created.  In this case, a tax or the cap and trade plan will cause the price of carbon emitting products to shift to S2.  The red triangle, known as the dead weight loss, is how much efficiency is lost in the market due to the governments intervention.  This can be corporate profits, which leads to job loss and other aspects of production loss.

This means for the consumer that prices will increase.  Does this mean we should tar and feather Gore and the climate scientist for telling us about the change in our climate, and all the politicians that propose these regulations.  Not at all.  In the short run, it is rational to be angry about the change in price.  So what is our response to the higher prices.  We consume less, or alter are habits.  For example, we trade in that good ole American pick up truck for a hybrid.  The drop in demand for carbon emitting products will eventually shift the cost back to market equilibrium.  If no one wants the product, you have to sell it at a price where consumers will buy it.  We can also start demanding alternate fuel and energy sources.  This artificial change in price can nudge us in a direction where we are more responsible with what we put in the air.  I highly doubt that any action will occur in in the near future dealing with climate change, mostly because government officials fear the size of the dead weight loss.  It is not in the nation's best interest to impose a tax on carbon at a time of economic instability.  It is interesting to see how this debate on environmental policy will shape in the future, that is, if it is ever considered.  So I am going to wait these increasingly more violent hurricanes out and hope that something is done.     

Do Not Let Lou Dobbs Read This

A study performed by the Federal Rserve shows that immigration does not take away jobs from Americans. (Immigration and Employment numbers)

Link to the actual Fed report

The Recession that changes the American economy?

I was reading the blog of Greg Mankiw and he directed me to the following link.  (Robert Barro) For those that do not know who Barro is, he is a very well known economist whose work can be accredited to the formation of the before mentioned Ricardian Theory. In his article, he is harsh on President Obama's method of handling unemployment. His reasoning is that Obama basically turned the unemployment system, which usually last for 26 weeks after being fired, to a program that has the possibility to last two years.
To his credit, he makes a good point. There is a disincentive for workers seeking work if they receive benefits. They may be pickier with the jobs they choose, rather than taking any job they can, prolonging unemployment. However, it is important to think about if there are really jobs out there. Let's break down GDP to see the shifts in our economy to compare it to the days of Reagan and his recession in 1983. In 1983, the trade deficit was close to 58 million dollars. Since that time, it grew to about 375 million in 2009.  (Trade history.)  This is not a big surprise, especially due to China and Germany emerging as international exporting powers. So fewer countries are buying our goods and services since the 1983 recession. Let us look at personal consumption. In 1983, the average household saved 9.3 cents per dollar. Last year, saving peaked at 4.3 cent per dollar. What this says is that more people are consuming, leading to a drop in investment. This happens because people save less, and the money that is foregone in savings cannot be lent out by banks. What this data is telling us is that fewer countries are buying our goods and services and we are consuming at a much higher rate than in the past.


This data is telling of the true American economy. America has transformed from the manufacturing center of the world to the buyers of all world products. This makes total sense; it is more rational to buy a good made in China for $1 than buy an American good for $2. This is possible because of the devaluation of their currency, and lack of worker's rights laws. They can afford to sell their goods for so cheap, and it has helped develop their economy. America is now a major service provider. The New York Times reported today that New York's economy is not as bad off as originally predicted. A big part of it is the reemergence of its financial sector. Bank and investment groups have been rallying and been hiring. Chances are if you are trained in finance, you will have an easier time getting a job than a person trained on an assembly line.

The major economic implication is if America can lessen its trade deficit, we can eventually see unemployment drop.  If America can become a major influence in the world market, we can bring the manufacturing sector back to the states. If not, we can expect structural unemployment to rise. This would happen because finance is such a specialized field. The skill levels for finance and the struggling manufacturing sector are extremely different. There will have to be a transitioning period to allow people to swap fields (if manufacturing does not rebound in America) so they can be retrained in a new line of work.

Going back to the article written by Barro, has Obama created a disincentive for people to work. Yes, any government subsidy for unemployment makes people not look as hard for a job. What is mostly happening is people are being more selective in their job search rather than taking a job to feed their family.

Are balanced budgets the appropriate tool for fiscal responsibility?

Marco Rubio, Republican candidate for Florida's Senate seat addressed Freedom Works Friday night about his proposals for bringing America back to its roots. A key component of his proposal is that he will fight for a balanced budget amendment. In my previous post, I spoke about fiscal responsibility and lowering the national deficit. This would lead you to believe I would jump all over this idea as a novice idea to restoring America's economy. Balanced budgets are a terrific idea, and should be what we strive for every time a budget is submitted. However, if balanced budgets are mandated by law, it would dangerously affect America. The reason for this is that the government can take actions to lessen the effects of a downturn in the economy. Remember, one of the first principles of economics is the government can (in some cases) improve market conditions.


The best example to show this argument is the current economic situation we are facing. At the national level, two actions were taken by Congress to slow down the recession. Congress cut taxes and increased government spending. Each action taken by Congress adds to the current deficit because the tax breaks decrease government revenue and the increased spending from the government is on borrowed money or the selling of bonds through the FOMC. This form of deficit spending is necessary when facing tremendous downturns in the economy like America did. If gauged right, Congress or the Fed can take action to undercut the most severe parts of the recession. However, with a balanced budget amendment, the only option Congress can do is cut taxes and cut spending. You may think that this is a great idea, lowering taxes via spending cuts, but you must look deeper into it. There are automatic stabilizers built into America's economic policy that are there to help the economy during down times. For example, unemployment pay. When the government goes south, more people lose their job. This means that the number of people receiving unemployment benefits increase, which is good. The reason for its necessity is because it prevents people from reaching unrecoverable poverty, but also gives money directly to people so they can spend it. If there was no unemployment benefits, the two or three extra percent of the population that became unemployed would stop spending money because they have no money to spend. The direct aid to the people helps maintain some level of consumer spending. Under a balanced budget, the government would have to cut and cut and continue to cut spending to a point where it would not be able to prop up any program to keep the economy from falling into a further downturn.

Looking at states with balanced budget amendments, it seems from the data provided by the Bureau of Labor and Statistics are hit harder than states without the amendment. Looking at California, Rhode Island, South and North Carolina, compared to Montana, Pennsylvania and Texas, this shows to be true. CA, RI, SC and NC all have unemployment over 10%, with the highest California at 12.3%. The states without the balanced budget amendments had significantly lower unemployment rates. This does not hold true with Nevada and Michigan for obvious reasons. Nevada was destroyed by the housing bubble and the downturn of the automobile industry in Michigan (which was a major employer) added to tremendous levels of unemployment unlike in any other state.

Let’s look at California. It has an amendment to balance its budget every year. However, when the recession hit, many people lost their jobs and became dependent on temporary unemployment benefits. More money had to be sent to aiding the programs to help its people, the only problem was the money had to come from somewhere. Unfortunately for California, they had no options but to cut a tremendous amount of its economy just to pass a budget. This mandated austerity proved to greatly hurt its economy. With a national balanced budget amendment, California can easily become the American economy. The government has to have the power to deficit spend in desperate times.

Tea Party, 828 Rally, Taxes and the Future

So tomorrow Glenn Beck and Sarah Palin are hosting the 828 "restoring faith and honor" rally at the Lincoln Memorial. There is a great deal of excitement among the people that support the Tea Party platform mostly because they believe they are in the process of revitalizing America. From what I am understand, the Tea Party is strictly a fiscal advocacy group concerned with government spending, size and the deficit. (Gallup Poll Data). According to a Gallup poll, the two greatest concerns on the Tea Party is that the government is too large and the deficit is too big. By no means are these concepts radical, but in my opinion, very fair points. However, it is concerning on the method that political backers of this movement propose to handle the deficit. It is being proposed that cutting taxes will actually increase government revenue. The rationality behind this is that lower taxes equal larger economic growth because more money is in the hands of people, and when they spend the money, it creates more jobs. The more jobs created directly results in an increase in government revenue because more people are paying taxes. This concept is the trademark of Art Laffer's reasoning for the Reagan tax cuts in the 1980s. Unfortunately, he under estimated the optimal level of taxation and government revenues decreased. To be fair, Reagan did not inherit an economy that was recovering from stagflation and was recently throw into a recession.

The question that I ask myself is if lower taxes will really create economic growth and benefit the economy as suggested by the Tea Party. In the short run, I say yes. The current economy is very fragile and in need of as much stimulus as possible. In my opinion, and along with trained economist, deflation can throw America into another recession, and hinder all action Congress and the President has taken to stimulate the economy. This is a very dangerous thought because if long term unemployment persists, the structural level of unemployment can increase to more than six percent. According to the Ricardian Equivalence theorem, a sharp cut in taxes now will mean the need for higher taxes in the future, resulting in slowing of the economy at a later point in time. Even resetting the tax rate from the Clinton era would greatly benefit the economy in the long run (These taxes should be enacted once the economy is more stable).

My rationality for the use of the Riccardian Equivalence is this. By cutting taxes, you are creating a multiplying effect for every dollar spent. For example, for every extra dollar spent by a consumer, this will flow throughout the economy. With more dollars in the economy, inflation will occur and interest rates will drop. However, at the same time, the nominal level of national debt will increase because of interest on the debt. The decrease of interest rates drops the value of the dollar, causing less foreign and domestic firms/governments/etc. to invest into the dollar. To fund current government programs in the future, the government can cut spending, borrow more, or raise taxes. The problem with spending cuts is it won’t solve the debt problem. The issue with more borrowing is if interest rates drop to a level where investors feel they cannot make money on their investment, then they will not lend as much money we need. This is a somewhat plausible scenario, mostly because if the value of the dollar slips below the value of other currencies, investors will lend to the currencies that have higher rates. The last option is to raise taxes. The increase in taxes will slow economic growth, resulting in interest rates and the value of the dollar to rise. The tax increase in the future will be larger than if tax increases were instituted after the economy recovers, unless there is a significant growth in the workforce. The tax increase is the most viable option for future ways to control the debt and maintain our spending in the future.

In my opinion, it will benefit America as a whole if the debt levels can be brought down now to avoid even higher taxes in the future. The obvious answer to the question if debt should get passed along to the next generation is no. However, a great deal of the platform proposed by the Tea Party movement consists of tax cuts along with spending cuts. There are several plans floating around Tea Party backed politicians, including privitization of Medicare, but there is no tangible plan for spending cuts by the party. It does not seem that the decrease in spending will equal the loss of revenue from the tax decreases. This is why I feel that we should bite the bullet now and be taxed at a higher rate, while cutting spending to bring down the debt. The debt is not of grave concern at this moment in American history, especially because other countries GDP to debt ratio is much higher than Americas. But there is no doubt that the debt will continue to grow, and a large percentage of government revenue will need to be spent on interest on the debt. In this case, I truly believe it is better to have some bad years now then horrible years in the future.

Welcome

Hey everyone.  I designed this blog to discuss basically what is on my mind.  There should be a fair combonation of politics, economics and a mixed array of topics.  Whatever comes to mind throughout the day I will try to post, mainly to ignite thought provoking conversation and ideas.  We will see.  Enjoy.